Money Matters: How to spend your tax refund

April 14, 2017 01:30

Sponsored by NEFE

Because of America's system of automatically deducting income taxes from paychecks, many people end up getting a refund when they file their tax returns each year. That lump sum of money may seem like an excuse to splurge, but there are other things you can do with that sudden infusion of cash. The average tax refund is around $2900 and a recent survey found nearly a quarter of people who get that refund, spend it within a few days. Instead, say experts, making a plan for how to spend it could help you accomplish some of your other personal finance goals.

As Yahoo Finance reports, Certified Financial Planner Mary Beth Storjohann suggests a "50-30-20" system. She recommends using 50 percent of your refund to pay off debts. Because of interest costs, it's often most beneficial to pay down your credit cards before spending money elsewhere, to save more money in the long run. She also encourages people to use 30 percent for savings. It's a good way to make sure your emergency fund (with three to six months of take home pay) is fully stocked in case unexpected expenses come up. And finally, she suggests using the remain 20 percent to go ahead and treat yourself. That money could go toward a future vacation, or be used for some shopping. By giving yourself permission to spend at least part of your tax refund, it makes paying down debt and saving the rest feel better.

To help your listeners/viewers/readers understand more about how their tax refund can help improve their personal finances in the short and longer term, talk with credit counselors or financial planning professionals in your market. They can talk about the importance of budgeting and planning, not just for money going out unexpectedly, but for when that little bit of extra money appears in your pocket.